Drilling technology expert National Oilwell Varco Inc. (NOV) reported light bookings for equipment in the third quarter, but there are signs that North American activity is going to improve at a modest pace, CEO Clay Williams said Tuesday.

Book to Bill

Williams and the management team for the Houston-based oilfield services giant discussed third quarter results and offered their take on what’s ahead for the global industry. Customers still want new and better drilling equipment, and NOV is ready to serve, he said.

“While our third quarter bookings were light and market conditions remain challenging, we are seeing some encouraging signals in the marketplace,” Williams said. “In North America, we believe drilling activity has bottomed and is likely to rise modestly from current levels. In our international markets, we are seeing more of our customers return to work and fewer Covid-19-related logistical disruptions.”

Low Blow

Still, U.S. drilling activity in 3Q2020 “was the lowest measured since records were started in the early 1940s, making this the worst quarter in the past 300 or so,” Williams said. “The Covid-19 pandemic response kept a lid on air travel in business activity, which depressed global oil demand and in turn diminished demand for NOV’s products and services.”

A Covid vaccine and “normalizing oil demand seem more likely than not in 2021, our customers, like us, are cutting costs and exercising extreme austerity in the near term, which led to modest orders during the third quarter.”

NOV realized “only 38% book-to-bill on a consolidated basis,” the CEO said. “Fortunately, though, we are seeing rising inquiries” in the Completion & Production Solutions (CPS) segment, which should lead to increased orders. In addition, the Rig Technology segment “already surpassed its total 3Q2020 orders level during the first few weeks of October. New products are helping drive demand for both segments.”

NOV also is exceeding its cost reduction targets, Williams noted. “We have reduced our global facility footprint workforce and support services, making our operations leaner and more efficient. We also continue to prune businesses that are not yielding adequate returns…On the other hand, we’ve talked far less about our new product investments, which we’ve been careful to sustain because they will form the foundation of NOV’s growth going forward.”

Among other things, hydraulic fracture (frack) stimulation remains a critical part of unconventional shale production, Williams said. The unconventional drilling revolution in North America “is built on fracking.” Today the industry is experimenting with using less natural gas and diesel to power fleets instead with electricity to reduce gas flaring emissions, “which can run well over $1 million per month.”

Completions

Frack Of The Future

NOV is finding its edge in that market, the CEO told investors. Among the drilling technologies unveiled in the quarter was the Ideal eFrac to accelerate the transition to electric fracking. Many exploration and production (E&P) customers want to reduce their gas flaring and carbon footprints, and electric drilling systems are used to replace diesel and gas power. In addition, NOV launched the Phoenix geothermal drillbit series to expand its footprint in the renewable energy market. 

“Generating power on site to run electric motors that in turn drive pumps instead of conventional direct drive diesel engines and transmissions can reduce mechanical complexity and maintenance costs. We’ve already seen this work in the drilling space, driving the evolution” of building rigs that use alternating current (AC) for exploration and production (E&P).

“The E&P companies embraced this AC electrification improvement and invested in new rigs,” Williams said. “Then something really interesting happened. They looked around when it was done and found their space reasonably well consolidated. That’s because only a handful of smart drillers could afford the price of admission to this new AC rig world. But those that made it clearly benefited…”

Even with the downturn in drilling dayrates, there is “healthy, strong evidence of an improved industry structure” as merger and acquisition (M&A) activity heats up, Williams said. 

“Much has been said of the need to roll up the pressure pumping sector across North America shale through aggressive M&A to drive consolidation. In my view, there is another capital efficient way to drive consolidation and that is through technology disruption.
“What we hear from E&P is that they are increasingly preferring electric frack to conventional fracturing for environmental safety and cost reasons…”

Regarding M&A opportunities, the CEO said NOV has “done some small investments here and there, more sort of rifle shot things. We’re continuing to look for opportunities there, but it’s a little more crowded landscape. So in view of that…our approach has been more around home growing organic development and building on the strengths that our organization has in the renewable space…which are considerable.”

NOV also is pursuing renewable energy opportunities to build a position in the offshore wind and geothermal energy space.
Regarding the hot market for hydrogen power, “NOV is  looking at a couple of things, but other areas in the renewable frontier at the moment probably have a little better fit to our skillset, and I think have a clear path for the creation of competitive advantage.”
In all things, though, “we’ve got to be good capital stewards through all of this,” Williams said. “The funding the execution of these business plans needs to earn a financial return…for the long haul…So that constrains what we do.”

The transition to a “carbon-free future is one of the greatest economic opportunities in human history,” Williams said. However, “we guide our decisions with respect to resource allocation. The first is that we will remain true to our oil and gas customers. We will continue to bring them new and better technologies and support their operations.”

Oil Not Down For Count

Williams took a few minutes to discuss the decision by some energy operators — and politicians — to transition from fossil fuels to alternative energy. It won’t happen anytime soon, he said.

“Despite the popular narrative that the world will soon abandon oil, we respectfully disagree and recognize it. Oil continues to lift people out of poverty and improve all our lives. There are currently more than one billion motor vehicles, 39,000 aircraft and billions of dollars of construction, mining and agricultural equipment around the world representing tens of trillions in capital investment.

“It all becomes worthless overnight without hydrocarbons, while renewable sources of energy will certainly grow in the mix of the energy pie.

“At the end of the day oil and natural gas continues to be the fuels that power the world,” Williams said. “When this crazy year passes and the economic shutdown fades, the world is going to need a lot more oil and gas, and the world will need this industry to get back to work. NOV is going to be there leaner and meaner than we’ve ever been to make sure it has what it needs to do so efficiently and safely.”

Net losses in 3Q2020 totaled $55 million (minus 14 cents), versus year-ago net losses of $244 million (minus 64 cents). Revenue fell 35% year/year and 7% sequentially to $1.38 billion. 

Wellbore Technologies generated revenue of $361 million in 3Q2020, down 54% year/year and 18% sequentially, with operating losses of $50 million, or minus 13.9% of sales. 

CPS revenue fell 17% year/year and was off 2% from 2Q2020 at $601 million. CPS operating profit was $25 million, or 4.2% of sales. New booked orders totaled $169 million, representing a book-to-bill of 43% when compared to the $394 million shipped from the backlog. At the end of September, backlog for CPS capital equipment orders was $789 million.

In the Rig Technologies segment, revenue was $449 million in 3Q2020, down 31% from a year ago and a 6% sequential decline. Lower sales were partially offset by higher revenue in the Marine Construction business, which is benefiting from offshore wind construction opportunities. Operating loss was $3 million, or minus 0.7% of sales.

New booked Rig Technology orders totaled $57 million in 3Q2020, representing a book-to-bill of 29% versus $199 million orders shipped from backlog. The backlog for capital equipment orders at the end of September was $2.66 billion.